ACHIEVING CLARITY China: Tax Framework - roedl.com
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ACHIEVING CLARITY China: Tax Framework
Overview of the Chinese Tax System
Taxpayers can be individuals, entities and economic organizations.
The major types of taxes in the People’s Republic of China (“Chi-
na”) are:
– Income taxes: Individual Income Tax (“IIT”), Corporate Income
Tax (“CIT”)
– Turnover taxes: Value Added Tax (“VAT”), Consumption Tax (“CT”)
– Property and behavior taxes: Stamp Duty, Deed Tax, Land VAT,
Real Estate Tax
– Customs duty
There are no longer any tax incentives / preferential tax treatments
for Foreign Invested Enterprises (“FIE”) after the Corporate Income
Tax Law (“CITL”) was enacted in 2007 to unify the income tax treat-
ments of domestic and foreign companies.
But there are still some key factors which would probably be relevant
to many Foreign Enterprises and FIEs, such as:
– Tax resident enterprises (“TRE”) / non-tax resident enterprises
(“Non-TRE”)
– Tax incentives: e.g. high and new technology enterprise (“HNTE”)
incentive, research and development (R&D) super deduction from
taxable income, technology transfer turnover tax / income tax
exemption, etc.
– Withholding tax
– Transfer pricing
2Corporate Income Tax (”CIT”)
SCOPE
All enterprises (including foreign investment enterprises, foreign enter-
prises and domestic enterprises) and income-generating organizations
within the territory of China shall be liable to pay enterprise income tax,
except for sole proprietorships and partnerships.
Tax resident enterprises:
– Tax resident enterprises refer to an enterprise established in China,
or an enterprise that is established under the laws of a foreign count-
ry but whose actual management or control is located in China;
– Tax resident enterprises shall pay enterprise income tax for income
sourced within and outside China;
Non-tax resident enterprises:
– Non-tax resident enterprises refer to an enterprise that is established
under the laws of a foreign country and whose actual management
or control is located outside China but which has an establishment
or place in China, or that does not have an establishment or place in
China but derives income from sources within China;
– Non-tax resident enterprises with an establishment in China shall
pay income tax on income sourced within and outside China that is
effectively connected with such an establishment, as well as income
sourced within China that is not effectively connected with such an
establishment;
– Non-tax resident enterprises without an establishment in China shall
pay income tax on income sourced within China.
3TAX RATES
Basically, enterprise income tax shall be levied at the rate of 25 %.
But there are some tax policies, including but not limited to:
– Small enterprises with thin profits are taxed on 25 % of the taxa-
ble income less than RMB 1 million and on 50 % of the taxable
income exceeding RMB 1 million but less than RMB 3 million at a
reduced rate of 20 % till December 31, 2021
– High and new technology enterprises engaged in state-encoura-
ged industries are taxed at 15 %
– Enterprises incorporated in western region and engaged in en-
couraged industries are taxed at 15 %
– Advanced technology enterprise are taxed at 15 %
– Non-tax resident enterprises with an establishment in China are
taxed at 25 % based on deemed profits from income sourced wit-
hin China
– Non-tax resident enterprises without an establishment in China
are taxed at 10 % on income sourced within China
Generally, the items permitted for deduction from taxable income
are the following, which are incurred directly relating to the income
derived by the enterprise on reasonable and actual basis when com-
puting taxable income:
– Costs
– Expenses
– Taxes
– Losses
4Transfer Pricing (”TP”)
China has adopted three-tier TP documentation structure, i.e. Master
file, Local file and Country-by-Country reporting. In addition, for speci-
fic transactions, special files are required. The detailed reporting requi-
rements are as follows:
TP-
Application Scope Deadline
Documentation
Master file – Annual related party transactions Within 12 months of the
over RMB 1 billion; or fiscal year ending of the
– Having cross-border related party ultimate shareholder
transactions and the Master file is
already available by the group level
Local file
Taxpayers meeting ANY of the follo- June 30, the following
wing criteria: year (should be submit-
– Annual buy-sell transaction value ted within 30 days upon
over RMB 200 million; request)
– Annual related party trans-
action for financial assets (e.g.
share / debt transfer) value over
RMB 100 million;
– Annual related party transaction
value for intangible ownership
transfer over RMB 100 million; or
– Annual aggregate value for other
related party transactions (inter-
ests for intercompany loans) over
RMB 40 million.
Special file
Taxpayers meeting ANY of the follo- June 30, the following
wing criteria: year (should be submit-
– Participate in the group cost sha- ted within 30 days upon
ring arrangement; or request)
– Exceed the related party
debt / equity ratio (i.e. 5 for finan-
cial institutions and 2 for the other
companies)
5Country-
– The taxpayer is the ultimate share- Within 12 months of the
by-Country
holder of a multinational group and fiscal year ending of the
Report
has its total income of the conso- ultimate shareholder
(“CbC-Report”)
lidated financials over RMB 5.5
billion; or
– The taxpayer is appointed by the
multinational group as the reporting
entity for the CbC-reports
On the other hand, companies only having domestic related party
transactions have been exempted from TP documentation prepara-
tion.
Enterprises with single function should prepare the local TP file for
the period in which the loss occurred, regardless whether they reach
the threshold for preparing the contemporaneous TP documentation
or not.
6Double Tax Treaty
between China and Germany
China and Germany have signed a revised double taxation agreement
(”DTA“) on March 28, 2014 and which has become effective on Janua-
ry 1, 2017.
WITHHOLDING TAX RATE OF DIVIDEND
The withholding tax rate on dividends is lowered from 10 % to 5 % if
the beneficial owner is a company which holds directly at least 25 %
of the shares in the company paying the dividend.
In addition, capital gains derived from a transfer of shares in a Chine-
se company, in which less than 25 % of the shares are held by a Ger-
man company, could be exempted from taxation in China if certain
conditions are fulfilled.
TAX RELEVANT PERIODS
The threshold of service permanent establishment (“PE”) is 183 days
within any 12 months, and the threshold of “construction PE” is ex-
tended to “12 consecutive months”.
The threshold for taxation upon Independent Personal Services &
Employment is 183 days within “any 12 months”, which is identical
with the determination of a PE.
7ROYALTIES DIFFERENTIATED
The actual tax burden for royalties in some cases may be lowered
from 7 % to 6 % if the royalties are paid as consideration for the use
of, or the right to use, any industrial, commercial or scientific equip-
ment. The royalties for patent, trademark, information (know- how)
concerning industrial, commercial or scientific experience, etc. shall
be still subject to 10 % withholding tax.
In the new DTA, 15 % deemed withholding tax credit in Germany for
interest and royalties provided in the previous DTA is omitted.
8Individual Income Tax (”IIT”)
TAX PAYMENT OBLIGATION
Individuals are obliged to pay IIT in China if they:
– Are domiciled in China
– Have resided in China for 183 days or more accumulatively in a
calendar year
– Have resided in China for less than 183 days in a calendar year
but have income derived from China
Individuals who meet the first two criteria are defined as resident
taxpayers, and those who meet the third criterion are defined as
non-resident taxpayers.
TAXABLE INCOME AND TAX RATES
IIT is levied on the following types of income, including but not limi-
ted to:
– Income from wages and salaries;
– Income from remuneration for personal services;
– Income from author‘s remuneration;
– Income from royalties;
– Income from business operation;
– Income from interest, dividends and bonuses;
– Income from lease of property;
– Income from transfer of property;
– Incidental income, etc.
For the first four types of income, progressive tax rates ranging from
3 % to 45 % shall apply. For income from business operation, progres-
sive tax rates ranging from 5 % to 35 % shall apply. For income from
interest, dividends and bonuses, income from lease of property, in-
come from transfer of property and incidental income, a proportional
tax rate of 20 % shall apply.
GENERAL TAX TREATMENTS
For resident taxpayers, the first four types of income should be sub-
ject to IIT in a consolidated manner based on a tax year (hereinafter
referred to as the „consolidated income“); and non-resident taxpay-
ers shall declare IIT based on each income item under each category
on a monthly basis.
9– For consolidated income of resident taxpayers, the amount of
taxable income shall be the balance after the standard deduction
of RMB 60,000, as well as special deductions, additional special
deductions and other deductions specified by regulations from
the income amount of each tax year;
– For income from wages and salaries of non-resident taxpayers,
the amount of taxable income shall be the balance after the stan-
dard deduction of RMB 5,000 from the monthly income;
– for income from remuneration for personal services and income
from royalties, the amount of taxable income shall be 80 % of the
amount of each income item;
– for income from author‘s remuneration, the amount of taxable in-
come should be 56 % of the income amount.
For foreign individuals who meet the condition as a resident taxpay-
er, they may choose to adopt the following additional special deduc-
tions:
Items of additional special deduction Deductible amount standard
Children’s education RMB 12,000 per year (RMB 1,000 per
month) for each child
Continuing education with degree RMB 4,800 per year (RMB 400 per month)
Advanced Vocational Training RMB 3,600 per year (only deductible in
the year of obtaining certificate)
Medical treatment of critical illnesses Deduction based on actual amount for ex-
penses over RMB 15,000 that are borne by
the taxpayer (under the medical insurance
directory). Upper limit is RMB 80,000
each year.
Interest expense of housing loan for RMB 12,000 per year (RMB 1,000 per
first-time buyers month)
10Housing rent expense RMB 9,600~18,000 each year (RMB
800 / 1100 / 1500 per month depending on
cities)
Caring for parents (older than 60 years) RMB 24,000 per year (RMB 2,000 per
month)
or to enjoy the particular tax-exempted allowances which are appli-
cable to foreign individuals, i.e., housing rent allowance, meal all-
owance, laundry expenses, relocation allowance, reasonable travel-
ling allowances for business travels, reasonable allowance for home
visits, language training expenses, children’s education allowance,
on an actual basis during a 3 years’ transition period from January
1, 2019 to December 31, 2021. The additional special deductions and
the tax-exempted allowances cannot be applied at the same time.
Once the selection is made, it cannot be changed during a calendar
year.
11Turnover Tax
VALUE ADDED TAX (”VAT”)
Taxpayers are obliged to pay VAT if they are engaged in the following
activities within the territory of China:
– Sale of goods
– Provision of processing, repair or replacement services
– Importation of goods or
– Provision of services
The current VAT rates are as follows:
Taxable Transaction Applicable Rate
Sales or imports of goods* 13 %
Provision of processing, repair and replacement services 13 %
Provision of transportation services 9%
Leasing of tangible goods 13 %
Provision of other modern service 6%
Provision of postal service 9%
Provision of telecommunication service
– Basic service 9%
– Value-added service 6%
Provision of finance service 6%
Provision of construction service 9%
Provision of personalized services, such as entertainment,
6%
hospitality
Transfer or leasing of immovable assets 9%
* Agricultural products and natural gas will be subject to a VAT rate of 9 %.
12VAT taxpayers in China are divided into General and Small-scale
payers. Which type of taxpayer is applicable is determined by the
competent tax authority depending on the business operations and
the degree of sophistication of the accounting system. The annual
sales amount criteria is RMB 5 million. Enterprises that have already
been registered as General payers are allowed to be re-registered as
Small-scale payers.
General taxpayer and Small-scale taxpayer are subject to two dif-
ferentiated taxation systems which feature differences in tax rates
of output VAT and crediting of input VAT. Small scale VAT payer is
subject to a reduced tax rate of 3 % for all transactions but could not
credit any input VAT.
It should be noted as a transition period, currently not all input VATs
are allowed to be credited such as those levied on receiving the fi-
nance and personalized services. And for some transactions, Gene-
ral VAT payers could also choose to pay VATs on simplified method
which is levied on a reduced tax rate (e.g. 5 %) without crediting the
relevant input VATs.
Tax refund is granted to taxpayers who export goods from China,
with few exceptions, so that the amount of the overall tax burden
for export goods is limited. In addition, taxpayers providing cross-
border VAT-subject services are eligible to enjoy “zero” VAT rate or
VAT exemptions.
13Customs Duty
IMPORT / EXPORT DUTY
China customs imposes import customs duty (“CD”) on imports into
China, and export CD on a few goods exported from China. The CD is
generally calculated by ad valorem and in a few cases, calculated by
quantity, or by any other means as stipulated by the State.
CUSTOMS DUTY RATES
Import duty rate is mainly decided by the tariff code of the goods
to be imported. The country of origin of the goods is also a deciding
factor of the applicable import duty rate.
EXPORT DUTY RATES
There are export duties on a few export goods and the duty rates are
decided by the tariff codes of the goods.Your contact
VIVIAN YAO
Certified Tax Adviser (China)
Partner
T +86 21 6163 5200
vivian.yao@roedl.com
GUANGZHOU SHANGHAI
45/F, Metro Plaza 31/F LJZ Plaza
183 Tian He North Road 1600 Century Avenue
510620 Guangzhou / Kanton 200122 Shanghai
T +86 20 2264 6388 T +86 21 6163 5300
kanton@roedl.com shanghai@roedl.com
BEIJING TAICANG
Suite 2200, Sunflower 16/F Dong Ting Building
37 Maizidian Street, Chaoyang District Middle Zheng He Road 319
100125 Beijing 215400 Taicang
T +86 10 8573 1300 T +86 512 5320 3171
peking@roedl.com taicang@roedl.com
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